Comparative data analysis22 April 2024

According to the provisions of the Income Tax Acts, local transfer pricing documentation generally should include a comparative analysis or a conformity analysis. What should a properly prepared analysis contain? We clarify all doubts in the following article. 

Comparative analysis – what is it? 

Comparative data analysis is commonly known as “benchmarking.” Its essence lies in comparing the result of a controlled transaction with the results achieved by entities conducting similar transactions under market conditions. 

A diligently conducted comparative analysis serves as confirmation for the taxpayer that the terms agreed upon in the transaction do not deviate from the arm’s length principle. Having such documents can significantly expedite audit procedures and protect against additional income assessments. 

Description of the comparative analysis as one of the elements of local transfer pricing documentation 

The content of the Income Tax Acts indicates that one of the elements of local transfer pricing documentation is the analysis of transfer prices. By regulation issued by the Minister of Finance, it was specified that one of the elements of transfer pricing analysis is the description of the comparative analysis, which should include: 

  1. a description of the process of searching for and selecting data and indication of the sources of this data, 
  2. justification for the selection of search criteria and assumptions adopted for the analysis, 
  3. if such data are available, the comparative analysis should include comparative data in electronic form allowing for their editing, including financial indicators, along with their description, relating to transactions concluded by a related entity with an unrelated entity (internal data) or concluded between unrelated entities (external data), 
  4. justification for the reasons for including multi-year or single-year data in this analysis, 
  5. justification for the choice of financial indicator adopted for the analysis, if applied, 
  6. description of comparability adjustments along with justification if applied, 
  7. indication of the point or range determined as a result of this analysis along with a description of statistical measures if applied. 

What if there is a lack of data for conducting a comparative analysis? 

The lack of data availability or difficulty in obtaining them does not exempt from additional documentation obligations. 

In such cases, instead of a standard comparative analysis, a so-called conformity analysis should be attached to the local transfer pricing documentation. The purpose of this analysis is to demonstrate the conformity of the transaction terms and other events established with related parties to the conditions that independent parties would establish with each other. 

Description of the conformity analysis as one of the elements of local transfer pricing documentation 

The description of the comparative analysis is an element of local transfer pricing documentation that serves as an alternative to the description of the comparative analysis. Substituting the description of the comparative analysis usually occurs in transactions where it is not possible to gather sufficient market data or where the nature of the transaction does not allow for it. 

According to the ordinance, the description of the conformity analysis should include: 

  1. justification for the chosen valuation technique, 
  2. description of the data sources used for the valuation, 
  3. description and justification of the assumptions adopted for the valuation and forecasts, in particular, assumptions for valuation indicators and the method of calculating these indicators, 
  4. sensitivity analysis indicating the impact of changes in individual assumptions on the valuation result, 
  5. justification for the selected point within the value range of the subject of the controlled transaction. 

Comparative data analysis as an integral part of local transfer pricing documentation 

In addition to the description of comparative analysis or conformity analysis, which are elements of local transfer pricing documentation, tax laws impose on taxpayers the obligation to prepare comparative data analysis, such a document should constitute an attachment to local transfer pricing documentation. 

According to the Ordinance of the Minister of Finance regarding transfer pricing, such research includes the following stages: 

  1. determination of the period to be covered by the study, 
  2. analysis of information concerning the related entity and its economic environment, 
  3. analysis of all circumstances of the controlled transaction being examined, which may have a significant impact on the level of transfer pricing, taking into account the functions performed, assets engaged, and risks incurred, and, if necessary, the selection of the entity being examined, 
  4. verification of whether there are internal comparative data that can be used for the purposes of comparability analysis, 
  5. identification of available external sources of comparative data, 
  6. selection of the most appropriate method and financial indicator, in case the financial indicator analysis is necessary for the correct application of the most appropriate method, 
  7. analysis of available comparative data, particularly in terms of their comparability with the transaction being examined, 
  8. making comparability adjustments if they are necessary to achieve a higher degree of comparability of comparative data to the controlled transaction being examined, 
  9. calculation of the results of the comparability analysis and their interpretation. 

Sources used for comparative data analysis 

Comparative analysis can be conducted based on two sources – internal or external. 

If the entity obliged to prepare the benchmark concludes transactions with both related and unrelated entities, the conducted comparative data analysis may be based on internal data. In this case, operations conducted with related entities are compared to conditions under which they are carried out with unrelated entities. 

If the entity does not conduct comparable transactions with unrelated entities, the comparative data analysis should be based on external information. For example, this information can be obtained from databases collecting financial data on the activities of third-party entities. When conducting the analysis, it should be remembered that the data possessed should accurately reflect the transaction conditions. In establishing a group of comparable entities, aspects such as industry, scale of operations, business model, and location of operations of comparable entities should be taken into account. 

Exemption from the obligation to prepare a comparative analysis or conformity analysis – when is it possible? 

The content of the Income Tax Acts provides for the possibility of exemption from preparing a comparative analysis or conformity analysis in certain cases. 

The first possibility of exemption concerns controlled transactions concluded by related entities meeting the conditions for micro or small entrepreneur status under the provisions of the Entrepreneur Law Act. 

In practice, this means that the exemption may be used by an entity that in the tax year preceding the year of concluding the controlled transaction met the following conditions: 

  • employed an average of less than 50 employees, 
  • achieved annual net turnover from sales of goods, products, and services, as well as financial transactions, not exceeding in Polish zlotys the equivalent of 10 million euros, or the sum of its balance sheet assets did not exceed in Polish zlotys the equivalent of 10 million euros. 

According to the Act, these values are converted into zlotys according to the average exchange rate announced by the National Bank of Poland on the last day of the given year. 

The second possibility concerns transactions other than controlled transactions. The documentation obligation may arise in the case of conducting transactions with unrelated entities but having residence, registered office, or management in the territory of a so-called tax haven, i.e., a country applying harmful tax competition. 

In such a situation, local transfer pricing documentation also does not have to include a comparative analysis or conformity analysis. 

It is worth remembering that exempting oneself from preparing a comparative analysis or conformity analysis does not exempt taxpayers from determining market transaction conditions. A well-prepared comparative analysis or conformity analysis can be a factor contributing to reducing tax risk in the event of a possible audit. Therefore, it is worth considering whether preparing a comparative analysis will be the optimal solution for the taxpayer each time, despite the possibility of exemption. 

Deadline for preparing a comparative analysis 

The deadline for preparing documentation containing a benchmark expires by the end of the 10th month of the tax year following the tax year for which the documentation is prepared. 

However, by the end of the 11th month following the tax year for which the documentation is prepared, you must submit information on transfer prices to the tax office in the form of TPR-P or TPR-C.

Don’t know how to start determining the obligation to prepare transfer pricing documentation? Familiarize yourself with our article ABC of Transfer Pricing Documentation, which serves as an introduction to transfer pricing issues. 

Piotr Zarański